Markets and CEO Pay

There is no such thing as the “true” value of units exchanged in a market place. In the market place, value boils down to the point of overlap between what buyers are willing to pay and what sellers are willing to accept. Value is not a property of the object but of the transaction. On the buyer’s side, value is informed by consideration of opportunity costs, alternatives, scarcity, and current market rate (among other things).
People are paid differently for their services. When the pay is in the stratosphere – as in the case of some CEOs – many of us become outraged. “That’s obscene! They don’t deserve that!” The disgust tends to focus on the individual receiving the pay. But pay is another way of saying market value and market value is determined by both sides of a transaction. So an equally indignant question could be “Why were the shareholders willing to pay one person so much money?!”

That changes the focus though. It’s easier to vilify those on the receiving end of huge pay packages – evil CEOs! But it’s shareholders who agree to these packages – and they want to pay big. In fact, shareholders have gotten increasingly generous since SEC reforms forced companies to be more transparent about executive pay. As James Surowiecki put it: “…shareholders, it turns out, rather than balking at big pay packages, approve most of them by margins that would satisfy your average tinpot dictator. Last year, all but two per cent of compensation packages got majority approval, and seventy-four per cent of them received more than ninety per cent approval.”

Granted, in making my point, I’ve used the term “market value” somewhat loosely. The technical definition is: "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion." (International Valuation Standards 1 - Market Value Basis of Valuation, Seventh Edition).

Actually, the technical definition is of use here. The SEC regulations making CEO pay more transparent were an attempt to create conditions conducive to proper market valuations – that is, conditions in which “the parties had each acted knowledgeably, prudently, and without compulsion." The idea being that executive wannabes won’t be able to demand outrageous pay packages because transparency will give the shareholders the necessary information to make reasonable pay decisions. Hah!

So, the shareholders are equally to blame for high CEO pay. Who are these shareholders? They are us. Or, at least, about half of us. That’s right: according to the Fed, in 2013 48.8% of Americans owned stocks (directly and indirectly). That includes money invested for 401Ks and pension funds – ultimately money that will benefit a much broader swath of American society than the despised 1%. Who are the villains now?